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$519 1
000 Annual Interest Rate: 15% Monthly Payment: $1 1
000 as a comparison loan amount 1
000 borrowed! Here again the total interest cost is the total payments to be made (360 x $1 1
000 borrowed. The total interest cost is the total payments (360 months x $599.55 = $215 1
000 borrowed? Or is there something more but which bankers never talk about publicly? Again the example is a $100 1
000 debt over 30 years is $2 1
000 for each $100 1
000 in interest is leveraged by the nominal method into a 30 year debt costing $653 1
000 in interest! (tables to show the data are provided by Tim 1
000 loan repaid over 30 years and at a "nominal" 15% per annum the required monthly payment is $1 1
000 loan requires 18.68 years to pay off based on monthly payments of $1 1
000 loan requires 28.67 years to pay off with monthly payments of $599.55. If the lender uses the nominal method 1
000 loan. If you signed the same document at a U.S. bank 1
000 loan. One is 93% more expensive than the other. The issue is no more or less than that. Nominal Method error is exponential or geometric In the U.S. 1
000 millions of initial capital 1
000 mortgage. Again 1
000 mortgage. If the lender claims that the stated 15% per annum is nominal and not real 1
000 or 98% will be retained by the financial middleman that makes its profit on the spread between interest money collected from borrowers and that paid out to depositors. The use of the nominal method can easily triple or quadruple the inherent profitability of the banking/credit business even after an allowance is made for greater defaults. At a nominal 60% per annum 1
000% and not 180% - a thousand-to-one difference in magnitude? It is precisely analogous (height-wise) to not being able to tell the difference between a child's doll house and the Empire State Building! The concurrent paradox is as to how the bogus “nominal” interest calculation methodology that is prohibited and criminalized in the U.K. under the Consumer Credit Act of 1974 (and multiple U.K. Criminal Code statutes) 1
000% on a payday loan as somewhere between 180% and 850% and virtually no one notices. It is arguably the single most important determinant-in-fact of their quality of life and the masses are looking straight at the Empire State Building and being told that it is a child's doll house. Yet they have no clue even that there is something wrong with the numbers. We have truly been made innumerate. There was one government (or government sponsored) study that I came across related to the payday loan industry where it was suggested 1
000% per annum. It is a fairly simple calculation and easily verifiable.[1] So what is it about the mind that allows us to function in a world where there is no more real determinant of our quality of life than interest generally 1
000) and a fixed monthly payment amount ($599.55) the only way to measure the extra cost in dollars is by the time (and total payments) required to pay off the debt/contract (the amortization period). At a real 6% per annum a $100 1
000) with the result being $115 1
000) with the result being $355 1
000. The effect is absolutely breathtaking. This is no mere technicality 1
10% per annum 1
135 at 15%). Mathematically 1
135 gained from borrowers over the 30 year period only $10 1
135 greater) based on a nominal rate of 15% (vastly more if the overpayments on the mortgage were applied entirely to credit card debt). At 6% the foregone interest on the overpayments is only the $662 difference between $9 1
135 less (or investment earnings $519 1
189.46 1
198 for a $100 1
198 over 30 years. One is 93% more expensive than the other. And the Congress calls it consumer protection! In summary and conclusion 1
198) minus the principal sum loaned ($100 1
198. Now the $171 1
198. What may appear to be a near trivial difference is actually a form of mathematically engineered leverage which increases the total cost of borrowing (cost of the contract) by 93% at a stated interest rate of 15% per annum. A mortgage or any term loan is designed with the monthly payment amount determined so as to be just slightly more than the initial (first month's) interest cost so that the loan will take 30 years (or whatever desired amortization period) to pay off. By using the nominal method 1
2 here. How can something as manifestly important as a certain way that financial institutions calculate the amount of interest due from borrowers be recognized and prohibited as criminal fraud in the U.K. 1
2010 We hold these Truths to be self-evident... Tim Madden is an economist with expertise on credit and banking. Tim and I are colleagues in lobbying government for public banking 1
226 or about 2% will find its way into the accounts of depositors. The remaining $509 1
226. The overpayments with interest 1
243 or about $84 million per initial $100 1
264.44 = $455 1
264.44 If you sign in the U.K. you have undertaken to pay $283 1
264.44 If you signed in the U.K. 1
264.44 per month or $171 1
264.44. If interest were at a real 15% per annum 1
264.44. If the lender uses the nominal method 1
264.55 on a $100 1
293 for a $100 1
293 over 18.68 years. If you sign in the U.S. you have undertaken to pay $455 1
436 over 18.68 years but at this higher level the error in the nominal method adds 11.32 extra years to create a debt with total interest payments of $355 1
4:03 PMLA County Nonpartisan ExaminerCarl Herman Previous Next Comment Subscribe ShareThis We hold these Truths as self-evident... Tim Madden is an economist with expertise on credit and banking. Tim and I are colleagues in lobbying government for public banking 1
500 to about $23 1
500.34. If the calculations are done correctly 1
500? Does a two and a half times increase in the stated rate from 6% to 15% cause a similar increase in the extra cost from $9 1
550 millions on $1 1
564 and $10 1
564 difference (the Bankers' Bonus) from the use of the nominal method therefore represents a 9% increase in the total dollar cost of borrowing 1
564 increase at 6% 1
564 per $100 1
754.17%) (^ means “raise to the power of”)) [2] The conventional power-of-two exponentiality occurs in this respect based on “calculating semi-annually”. “Calculating monthly” results in a somewhat greater relative error (about 10% per se 1
8.25 1
800 extra cost at 15% 1
800% in terms of extra dollars out of the borrower’s pocket from the math error 1
806 difference represents a 93.68% increase in the total dollar cost of borrowing or 48% of the total interest paid/collected over the 30 year period. The interest cost should be $183 1
806 is simply the sum of the extra 11.32 years worth of payments as if the borrower would otherwise stuff the money into a sock or under a mattress. If the lost opportunity cost is taken into account (i.e. 1
806 per $100 1
806 still owing on the contract after 18.68 years of monthly payments of $1 1
838) minus the principal sum loaned ($100 1
838. The $9 1
863 1
8:08 PMLA County Nonpartisan ExaminerCarl Herman We hold these Truths as self-evident... Tim Madden is an economist with expertise on credit and banking. Tim and I are colleagues in lobbying government for public banking 1
News Politics Nonpartisan http://web.archive.org/web/20140707171117/http://www.examiner.com/article/economist-tim-madden-u-s-canadian-consumer-interest-calculation-method-a-monstrous-fraud-1-of-3 Economist Tim Madden: U.S./Canadian consumer interest calculation method a monstrous fraud. 1 of 3 March 30 1
Visa banks 1
a careful examination of dozens of mainstream articles purporting to explain the many class-action lawsuits that have been initiated against payday loan companies across North America 1
a credit card company can gross an actual 80% per annum (at 5% per month). It can thus pay its bond-holders 1
a good start is to eliminate this systemic bias of U.S. banks to higher nominal 1
a lender may assess no more than 1.808% per month 1
a real 8.21 year debt costing $146 1
a typical large Canadian department store's use of the nominal method has boosted its total card-user debt by about $180 million. Based on the same cash flows 1
again 1
again at 2.82 percentage points on a stated 24% 1
and 0% from the other half at a nominal 0%. The average-in-fact is therefore half of 34.5% or 17.25% and not 16.1% based on a stated/nominal average 15%. In this (most extreme) example the standard deviation or average variance of the rate per contract accounts for a greater increase in percentage point gain (1.15 percentage points (i.e. 1
and also because certain other factors dictate that such a seemingly large spread is actually more appropriate than it may first appear.[1] Of the extra $519 1
and explained beautifully by many of America’s brightest historical minds. Tim’s following article is brilliant. He can be reached at: timothypmadden@gmail.com This is part 1 of 3. Part 2 is here. How can something as manifestly important as a certain way that financial institutions calculate the amount of interest due from borrowers be recognized and prohibited as criminal fraud in the U.K. 1
and explained beautifully by many of America’s brightest historical minds. Tim’s following article is brilliant. He can be reached at: timothypmadden@gmail.com This is part 2 of 3. Part 1 is here 1
and explained beautifully by many of America’s brightest historical minds. Tim’s following article is brilliant. He can be reached at: timothypmadden@gmail.com This is part 3 of 3. Part 1 is here 1
and loan fees plus the nominal method on the same loan have a truly astronomical effect.) 1
and nobody talks about it for thirty-five years? If we want to mitigate the coming (potential) hyperinflation 1
and only the nominal method 1
and still make a gross return of 70% per annum while telling the card-holder that they are paying 60%! So 1
and that revealing the real annual rate may well drive them further into depression! This is really a battle for your mind – the money is just a detail. [1] A deliberately simplified “nominal rate” example will make the principle clear. Assume that half of all loans are at a nominal 30% per annum and the other half are at a nominal 0% per annum. The average rate is a nominal 15% 1
and then again in London following closure and settlement in Hong Kong. Now your gross annual return is 155% or $1 1
and therefore higher still real 1
and to use a long enough period so as to clearly demonstrate the significance of the thing being measured. A 30 year period is used here because it is the standard amortization period on a residential mortgage in the U.S. Using $100 1
are the true measure of the benefits to the institution and cost to the borrower (and society in the aggregate). Even if a particular borrower does not have other loans to which the overpayments could be applied 1
as a matter of cold 1
assume that banks advance at a nominal 15% and pay depositors a nominal 6% so as to use the examples already covered 1
at 15% per annum the extra $171 1
at any given rate 1
augmented by the reality of having to pay $100 to get their $400 paycheck two weeks early 1
based on a disclosed/declared 24% per annum 1
but 1
but 0.065753% per day in the U.S. and Canada? The difference since 1974 when the U.S./Canadian method was criminalized in the U.K. now accounts for an amount greater than all outstanding consumer debt in the U.S. and Canada. (tables to show the data are provided by Tim 1
but 0.065753% per day in the U.S. and Canada? The difference since 1974 when the U.S./Canadian method was criminalized in the U.K. now accounts for an amount greater than all outstanding consumer debt in the U.S. and Canada. Calculated to deceive The U.S. (and Canadian) nominal method is criminal in the U.K. for very good reasons. The following comparison has been designed so as to demonstrate the cost of the nominal method in terms of dollars out of a borrower's pocket instead of just rate differences. Because most consumer interest payments are made monthly we will deal with the application of the nominal method to monthly interest charges or "calculating monthly" as it is sometimes called in the finance business. The nominal method is also referred to as the "straight division" method because the lender takes the stated annual rate and then divides both components of the rate by the number of payment periods in a year. For example 1
but 0.065753% per day in the U.S. and Canada? The difference since 1974 when the U.S./Canadian method was criminalized in the U.K. now accounts for an amount greater than all outstanding consumer debt in the U.S. and Canada. Is there any more important determinant of quality of life for a typical human than the broadly-defined concept of interest? It pervades and saturates the price of everything. In the past fifty years alone 1
but at a stated annual rate of 20% it is 20 x 20 = 400 times greater 1
but once again we want to isolate the extra cost of the nominal method and so that is the assumed (or control) payment amount. At a real 15% per annum a $100 1
but so that the lender receives interest amounts equal to the annual rate disclosed/agreed to 1
but the data exceeds Examiner.com's capacity. Please contact Tim at the above e-mail to receive the tables.) Problem much greater still The structure of the analysis (thus far) also substantially understates the real economic consequences in that the extra payments made by the borrower are assumed to earn zero interest themselves. For example 1
but the data exceeds Examiner.com's capacity. Please contact Tim at the above e-mail to receive the tables.) The second column from the right in the table gives the relative increase in the cost of borrowing. Lenders may claim that money is inherently less valuable in a world with 15% interest rates than in one with 6% interest rates and that it is therefore not fair to simply compare the extra money cost of the nominal method. The $171 1
but the very air in which credit card companies breathe. Over just the past five years for example 1
but where a typical observer/player cannot tell 1
can be recognized 1
compared to only 9% more money at a stated 6%. The nominal method presents a new and substantially greater real error with every marginal increase in the stated annual rate. Part 3: Problem much greater still At-large Council candidate Clark Ray calls for transgendered persons to be included in health report The NAACP: Still Stuck In The Past Top ten states fighting back against illegal immigration Will Old Spice Guy help Barack Obama get female voters back on the team? http://web.archive.org/web/20100716143152/http://www.examiner.com/examiner/x-18425-LA-County-Nonpartisan-Examiner~y2010m3d31-Economist-Tim-Madden-USCanadian-consumer-interest-calculation-method-is-monstrous-fraud-2-of-3 https://www.youtube.com/watch?v=Em-obLlY4q4 Death of fiat paper http://web.archive.org/web/20100406031756/http://www.examiner.com/x-18425-LA-County-Nonpartisan-Examiner~y2010m4d1-Economist-Tim-Madden-USCanadian-consumer-interest-calculation-method-is-monstrous-fraud-3-of-3 LA County Nonpartisan Examiner Economist Tim Madden: U.S./Canadian consumer interest calculation method a monstrous fraud. 3 of 3 April 1 1
declare that the annual rate is 24%. Such is illegal (criminal) in the U.K. where all lenders must declare 26.82% per annum as the true annual rate to 2% per month. At this level the 2.82 percentage point difference accounts for 10.5% of Visa's gross interest revenue in the U.S. (on any given day). After thirty years the interest overcharge compounded carry-forward is vastly greater than the debt itself. Also it is not merely a matter of disclosure because the annual rate is the rate the borrower understands and expressly contracts to. So it is more correct to say that in the U.K. 1
denounced and criminalized as “false and seriously misleading” in the U.K.[2] 1
ever so subtly 1
for a net cash advance of $300 today. According to a story on the CBC (Canadian Broadcasting Corporation) website 1
for example 1
for example: How much do payday loans cost? They are the most expensive legal way to borrow money. … Typically 1
from 15% to 16.1%)). Both factors cross-leverage or cross-compound-upon the other. (Concealed loan fees have the same geometric effect 1
from 16.1% to 17.25%) than the nominal method itself (1.1 percentage points (i.e. 1
from the far right column 1
from the three simple and given elements of the loan transaction just described 1
general use of the fraudulent methodology exactly doubles the amount of interest assessed/received by all financial institutions 1
had interest charges been made at a true 30% per annum (about 2.21% per month) then the card-users would owe about $420 million instead of the $600 million total debt which has resulted from charging 2.5% per month (a real 34.5% per annum). Multiply the dollar amounts by ten for the U.S. The highest nominal Visa credit card rate that I have encountered in the U.S. is a stated or claimed 79.9% (First Premier Bank Visa). Note the psychological manipulation inherent to not crossing the 80% threshold 1
hard 1
here is the deal offered to the public: Mortgage Principal: $100 1
however 1
if a borrower agrees to pay interest at 12% per annum by monthly payments 1
in many areas it has quietly caused the average price of a home to increase from about four years average annual wage 1
instead of the larger amounts determined by the recognized fraudulent formula 1
interest rates. Now is the time to force U.S. (and Canadian) banks to abandon the fraudulent calculation methodology 1
is actually required by law in the U.S. under the federal 1968 Consumer Protection Act (Regulation Z). Under the nominal method the same transaction is said to carry an annual interest rate of 869% (where the Financial Consumer Agency of Canada came up with 435% is anyone's guess). The relevant dictionary definition of “nominal” is “existing in name only 1
is almost 18 times greater than the $9 1
is just over 180 1
is over 20 times the maximum legal variance of 1/8 of 1% for disclosure accuracy. Above about 5% per annum the math error is above 1/8 of 1% per annum and would otherwise be illegal on that basis alone. Either way 1
it is necessary to compare identical payment streams applied against identical loans where the one and only difference (single variable) is the calculation method. Given a fixed loan amount ($100 1
lenders will increase the total amount of interest money exacted from all borrowers by 93% by simply using the nominal method. Of course the loan agreements don’t actually say "the nominal method" 1
like an iceberg 1
measured at the end of a twenty-five year period.[2] Part 2: Calculated to deceive. [1] (=(((1+($100/$300))^(365/14))-1)) = 1807.5417 = 180 1
much less explain what it means. In Canada it is simply the explanation given if and when (rarely in practice) a borrower discovers that their monthly payment does not correspond to the rate of interest stated and declared in the agreement. In the US there is no need for an explanation because the nominal method is required by law. The 6% and 15% per annum examples are highlighted in the table below. At the nominal 30% annual rate on many department store credit cards the monthly payment needed to retire a $100 1
not real or actual”. If all consumer debt in the U.S. were recalculated (since criminalization of the U.S. method by the U.K. in 1974) 1
once again 1
or 440 times greater at a stated 20% v 1% “calculated monthly” but only 400 times greater at 20% per annum “calculated semi-annually” versus 1% per annum “calculated semi-annually).http://web.archive.org/web/20140707171117/http://www.examiner.com/article/economist-tim-madden-u-s-canadian-consumer-interest-calculation-method-a-monstrous-fraud-1-of-3 Washington DC Politics LA County Nonpartisan Examiner LA County Nonpartisan Examiner Economist Tim Madden: U.S./Canadian consumer interest calculation method a monstrous fraud. 2 of 3 March 31 1
or about 24% of gross interest paid/collected (again on any given day – recall that at a stated 24% the 2.68 percentage point error represents only about 10.5% of gross revenue on any given day). And critically 1
or about 8.25% of the total interest money paid/collected over the 30 year period. What then happens to the extra cost when the same technically incorrect nominal technique is applied at 15% per annum? That is the approximate weighted average stated lending rate over the 30 year period 1974 to 2004 (about equal to prime plus 3%). Does the error stay the same at about $9 1
over 30 years at 6% per annum using the nominal method 1
over any given 30 year period 1
part 3 here. How can something as manifestly important as a certain way that financial institutions calculate the amount of interest due from borrowers be recognized and prohibited as criminal fraud in the U.K. 1
payable in two weeks time (14 days) 1
per se 1
per se. At a stated 30% it is 900 times greater 1
per se. At a stated annual rate of approximately 15% 1
per se. What the second column from the right shows is that regardless of the relative value of money 1
plus you still have your initial capital. Pretty sweet. Also note that tripling the number of daily iterations from 1 to 3 causes much more that a three-fold increase in the annual yield from 37% to 155%. And that is based on just 250 trading days per year. If you can perform the same function for a 1/8th of 1% gain per iteration three times per 24 hour cycle somewhere in the world 1
prohibited 1
representing an absolute increase of 1 1
reveals many that are simply dripping with mens rea or guilty conscience (guilty mind) in their use of evasive language. The cause of the system's guilty conscience is that the interest rate defined by that transaction 1
say 1
that charge 2% per month on outstanding balances 1
that is why the U.K. criminalized this insidiously fraudulent methodology in 1974. Spread nature of institutional credit From both an ongoing profitability and public policy perspective the most significant aspect of the nominal method is the exponential nature of the error and its relationship to the spread nature of institutional credit. For example 1
that many customers of payday loan companies are already suffering from psychological depression 1
that the annual interest rate is about 180 1
the creditor gets to both collect larger payment amounts which pay down the loan relatively quickly at the rate stated and collect those larger payments for 30 years anyway. It is also irrelevant that many lenders no longer make loans for fixed terms of 30 years. The 30 year period is simply a standardized reference period by which to demonstrate the radically different effects of the same math error at different "nominal" interest rates. At 15% per annum 1
the creditor is either in the business of loaning those overpayments to someone else (a small percentage) or using them (the vast majority by amounts) as a deemed equity base by which to advance new credit at interest. At a nominal 30% department store credit card rate 1
the first is the staggering amounts of debt and therefore money involved (several trillions of dollars since just 1974). The second is how something as important as this certain way a financial institution determines the amount of interest it assesses for its own account 1
the mathematical equivalent to 24% per annum. At this level the error 1
the nature of the discrepancy is geometric or exponential with respect to the represented annual rate. At 1% per annum the difference is tiny 1
the nominal method error increases exponentially in favor of the lender as the stated annual rate is increased. At the higher levels associated with credit card rates the error is positively obscene. The first step is to be certain to compare like things 1
the nominal method error manifests increasingly over time as debt still owing that would not otherwise be owing at the real annual rate. At a real annual rate of 15% there is exactly $0 left owing on the contract after 18.68 years of monthly payments of $1 1
the nominal method will cost the borrower 93.68% more of it at a stated 15% 1
the overcharge with interest is indicated as $83 1
the proper way to look at it is to assume that the borrower has up to several other loans and at the same rate of interest such that the extra payments on the first loan could be used to pay down the debt on the second and subsequent loans (or even put into a personal investment account). At the end of the 30 year comparison period the borrower’s total debt on all loans would be $519 1
the required monthly payment will be $599.55. If the interest charges were determined at a real 6% per annum 1
the true financial and economic damage) the amounts are greater and increasingly so at higher stated rates (e.g. 1
then it takes exactly 30 years to pay off the same loan with the same monthly payment. Now the cost to the borrower is 135.88 extra payments (11.3 years) of $1 1
then the lender will go into her account and assess 1% each month. Most American (and Canadian) consumers think this procedure is correct. Financial institutions are in the business of knowing that it is not. It would not be such a problem if the error were consistent 1
then the monthly payment would be only $589.37. Comparing two different monthly payment streams 1
then the monthly payments would be about $75 less at $1 1
then the same debt is retired after 8.21 years based on the same monthly payment. At a stated 30% per annum 1
then the same loan takes exactly 30 years to pay off based on the same monthly payment. The cost of the nominal method is slightly less than 16 extra payments of $599.55 for a total of $9 1
then there is $171 1
then there would today be no consumer debt in the U.S. - it is that significant a difference. Consider that you have just signed the following mortgage contract: Mortgage Principal: $100 1
then you agreed to pay the lender $455 1
then you agreed to pay the lender a total of $283 1
then your gross annual return goes to 293% or a $2.93 billion gross gain or profit per year per $1 billion. Now shift your frame of reference to a typical payday loan. The most common example given in the mainstream media involves the giving of a post-dated cheque (check) for $400 1
there are two distinct issues 1
to more than ten years average annual wage. And the velocity of interest is enormous. Vast sums can turn on fractions of a percent changes in the rate. That is why the base unit of measurement in the finance business is the basis point or 1/100 of 1%. Assume that you have a billion dollars to lend to facilitate the daily purchase of stocks on Wall Street and that you charge 1/8 of 1%. Settlement occurs upon closing of the market so you are limited to one cycle/trade per day (although 1
using the same cash flows 1
using two different calculation methodologies 1
verifiable fact 1
we would still save about 10% of all the interest money that will accrue over the entire period just by eliminating the Bankers’ Bonus. Also 1
where most of the mass floats below the surface of the water 1
where vast fortunes turn on small changes in rates 1
which corresponds to an actual 16.1% (assuming monthly payment). But in fact the lender(s) will receive an effective 34.5% from the half of all loans at a nominal 30% 1
while also implying that determination of the rate is a kind of black art that can give different results at different times. One article went as low as 180% per annum. Nobody appears to have complained or even mentioned it. At the same time 1
while being required by law throughout the U.S. under federal Consumer Protection legislation 1
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